Page 199 - DMGT409Basic Financial Management

Basic Financial Management

Notes 10. Dividend Policy of Competitors: Keeping one eye on competitors’ dividend policy is very

important. If the firm wants to retain the existing shareholders or it want to maintain share
price in the market, and if it is planning to raise funds from public for expansion programs,
it has to pay dividends at par with its competitors. Hence, it is one of the factors that

influence dividend policy of a fi rm.
12.4 Summary

z The term ‘dividend’ refers to that portion of company’s net earnings that is paid out to the
equity shareholders (not for preference shareholders, since they are entitled to have a fi xed
rate of dividend).
z Dividend policy of a firm decides the portion of earnings to be paid as dividends to ordinary

shareholders and what portion is ploughed back in the firm for investment purpose.
z Payment of dividend through issue of bonus share is a financial gimmick, since it will not

affect the owners’ wealth.
z Stock dividend is advantages for company and the owners.

z Stock dividend is also beneficial to owners by tax savings, indication of future benefi ts,
psychological value.
12.5 Keywords

Dividends: It refers to that portion of company’s net earnings that is paid out to the equity
shareholders.

Dividend Policy: It decides the portion of earnings to be paid as dividends to ordinary shareholders
and what portion is ploughed back in the firm for investment purpose.

Payout Ratio: The ratio of dividend to earnings is known as payout ratio.
Stability: It refers to the consistency or lack of variability in the stream of dividend payments.

12.6 Self Assessment

Fill in the blanks:
1. Dividend refers to that portion of companies .................. that are paid out to the equity
shareholders.
2. Distribution of profits between dividends and retained earnings affects the .................. of

the fi rm.
3. Dividend policy of a firm affects both .................. and owners’ wealth.

4. Investors’ desire for current income is one of the advantages of .................. policy.
5. Making share trading attractive is one of the reasons of ..................

State whether the following statement are true or false:
6. Dividend decision involves legal as well as fi nancial considerations.
7. Capital impairment rule says that dividends can be paid from capital.

8. Sec 205 of the Companies Act says that dividends can be declared only from current years

profits or from past reserves after providing depreciation.

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